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Rising demand for VCTs

Richard Troue looks at why sophisticated investors consider Venture Capital Trusts

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Venture Capital Trusts (VCTs) are proving popular with sophisticated investors this year.

And there’s only a limited amount of capacity remaining this tax year, with shares allocated on a first-come, first-served basis. We expect popular VCTs will sell out. Anyone wanting to invest will need to act quickly to avoid missing out. All investments fall as well as rise in value so you could get back less than you invest.

What are VCTs?

Launched in1995, VCTs are aimed at adventurous and wealthy long-term investors who are comfortable with higher risks. They invest in small companies, often at a very early stage of their development, or even just starting out.

Young companies, with a great product or service, can disrupt an entire industry or expand rapidly. They therefore have exciting growth potential. But, they’re not for the faint hearted - they also have the greatest chance of failure.

A VCT will typically invest in a company for 3-10 years. And to maximise the investment potential, they’ll use their resources and business-expertise to help the company grow.

Learn more about VCTs

Three extra reasons to consider VCTs

To encourage investment, and in recognition of the higher risks involved and complexity, the government offers a range of tax benefits to people investing in a VCT new issue. These include:

  • 30% income tax relief for subscriptions in new VCT fund raisings
  • Dividends paid by VCTs are free of tax
  • No capital gains tax (CGT) to pay when you dispose of the VCT

The income tax relief means if you invest £10,000 you could either receive a cheque from the taxman for £3,000 or a reduction in the income tax you pay. This applies to anyone, regardless of the rate of tax you currently pay.

You can invest up to £200,000 in VCTs each tax year and benefit from this tax relief. But remember the maximum tax rebate is the amount of income tax you pay, and you must hold the VCT for five years to keep the tax rebate. Dividends are the main source of returns as the VCT portfolio matures and can be powerful over the long term.

Remember tax rules can change and benefits depend on your individual circumstances.

Learn more

Our view

VCTs can be an important financial planning tool, both leading up to and in retirement for experienced investors. They could be the next port of call for tax-efficient investing after ISA and pension allowances have been used. That said, we don’t think they should account for more than 10% of an investment portfolio. The majority of an investor’s returns will come from dividends, and potential investors should note that the capital value of a VCT often falls substantially and they could get back less than they invest. Dividends will vary and are not guaranteed.

There is further information on VCTs on our website. Any decision to invest in a VCT should be made on the basis of information contained in the prospectus and Key Investor Information.

This article is not personal advice, so if you are at all unsure of the suitability of an investment for your circumstances please seek advice.

See latest VCT offers

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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